Siebert Financial Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying financial statements and related notes included under Part I, Item 1 of this Report. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our 2022 Form 10-K, particularly in Part I, Item 1A – Risk Factors.

Overview

We are a financial services company and provide a wide variety of financial services to our clients. We operate in business lines such as retail brokerage, investment advisory, insurance, and technology development through our wholly-owned and majority-owned subsidiaries.

Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed-income markets. Market volatility, overall market conditions, interest rates, economic, political, and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants who include investors and competitors, impacting their level of participation in the financial markets. In addition, in periods of reduced financial market activity, profitability is likely to be adversely affected because certain expenses remain relatively fixed, including salaries and related costs, as well as portions of communications costs and occupancy expenses. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.

Transaction with Kakaopay

On April 27, 2023, Siebert entered into the First Tranche Stock Purchase Agreement, pursuant to which Siebert agreed to issue to Kakaopay the First Tranche Shares at a per share price of Two Dollars Fifteen Cents ($2.15), which represented 19.9% of the outstanding equity securities of Siebert on a fully diluted basis (taking into account the issuance of the First Tranche Shares). The First Tranche Stock Purchase Agreement closed on May 18, 2023.

Concurrent with the execution of the First Tranche Stock Purchase Agreement, Siebert and Kakaopay entered into the Second Tranche Stock Purchase Agreement, pursuant to which Siebert agreed to issue to Kakaopay the Second Tranche Shares at a per share price of Two Dollars Thirty Five Cents ($2.35), so that Kakaopay will own 51% of the outstanding equity securities of Siebert on a fully diluted basis (taking into account the issuance of the First Tranche Shares and the Second Tranche Shares). The consummation of the Second Tranche is subject to a number of conditions, which have not yet been satisfied as of the date of this Report. Refer to Note 5 – Kakaopay Transaction for further detail regarding these conditions.

Concurrent with the consummation of the First Tranche, Siebert, Kakaopay, and the Gebbia Stockholders entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) whereby the parties agreed that Siebert’s Board of Directors would consist of seven directors. The parties agreed that following the consummation of the First Tranche, one of the seven directors would be designated by Kakaopay, and six (the “Gebbia Directors”) would be nominated by the Gebbia Stockholders, of whom three shall be independent directors.

Pursuant to the Stockholders’ Agreement, on May 24, 2023, the Board of Directors appointed Shin Ho-cheol, also known as Simon Shin, to the Board of Directors. The Board of Directors at that time also appointed John J. Gebbia as Chairman of the Board and Chief Executive Officer.

Concurrent with the consummation of the First Tranche, Siebert and Kakaopay entered into a Registration Rights Agreement (the “Registration Rights Agreement”) whereby Siebert agreed to grant Kakaopay certain registration rights with respect to certain securities of Siebert held by Kakaopay. In exchange for such registration rights, the parties agreed to a lock-up period ending the earlier of the outside date pursuant to the Second Tranche Stock Purchase Agreement and the date that such agreement is terminated.

As of the date of this Report, prior to the close of the Second Tranche, the Gebbia Stockholders are collectively Siebert’s largest stockholders, controlling approximately 43% of Siebert’s outstanding equity securities, under the Stockholders’ Agreement, holding the right to appoint six (6) of Siebert’s seven (7)-member Board of Directors. As discussed above, Kakaopay currently has the right to appoint the seventh director, and exercised that right through the appointment of Simon Shin to the Company’s Board of Directors on May 24, 2023. Upon the closing of the Second Tranche, Kakaopay will own approximately 51% of Siebert’s outstanding equity securities and will have the right to appoint four (4) out of seven (7) directors of the Company’s Board of Directors, while the Gebbia Stockholders will have the right to appoint the remaining three (3) directors. Pursuant to the Stockholders’ Agreement, at all times, three (3) of the seven (7) directors of the Company’s Board of Directors are required to be independent directors in accordance with Nasdaq Listing Rule 5605. Refer to the Company’s Current Report on Form 8-K filed on May 3, 2023, incorporated herein by reference, for further detail regarding this transaction.

Since the closing of the First Tranche, Korean authorities have taken action against Kakaopay, its parent company, Kakao Corp., and their affiliates. In addition, Kakao Corp., recently announced that it will establish an independent compliance committee for Kakao Corp. and its subsidiaries to address what it described as the current crisis at Kakao Corp. and its subsidiaries. Siebert believes these events have had a material adverse effect on both Kakaopay and its ability to perform its obligations under the Second Tranche Stock Purchase Agreement and consummate the transactions contemplated therein. Accordingly, on November 11, 2023, Siebert delivered a notice to Kakaopay stating that a material adverse effect had occurred with respect to Kakaopay and that, as a result, Siebert’s conditions to closing will not be satisfied. The notice also specified that Kakaopay has indicated that it has no intention of satisfying the conditions precedent to Siebert preparing the proxy statement contemplated by the Second Tranche Stock Purchase Agreement. Siebert is considering its rights and obligations under the Second Tranche Stock Purchase Agreement, including evaluating whether and under what circumstances the Second Tranche Stock Purchase Agreement might be terminated, and has reserved all of its rights and remedies, including Siebert’s right to assert that Kakaopay has materially breached a number of covenants in the Second Tranche Stock Purchase Agreement. On November 12, 2023, Kakaopay delivered a letter in response to the notice that expressed Kakaopay’s disagreement with the statements in the notice. As a result of the foregoing, Siebert has incurred and may incur additional legal expenses evaluating these matters, the amount of which is uncertain as of the date hereof.

RISE

RISE was an institutional brokerage for which all its revenue producing customers transitioned to other prime service providers by the first quarter of 2022. The expenses associated with the transition resulted in a loss of $0.2 million and $0.9 million for RISE for the three and nine months ended September 30, 2022, respectively. During 2022, there were various transactions involving the ownership of RISE. Refer to Note 3 – Transactions with Tigress and Hedge Connection and Note 4 – RISE for additional detail.

As part of this transition, Siebert had an agreement with JonesTrading Institutional Service, LLC (“JonesTrading”) whereby JonesTrading pays RISE a percentage of the net revenue produced by certain historical clients of RISE less any related expenses. For the three months ended September 30, 2023 and 2022, this agreement resulted in pre-tax income of $78,000 and $61,000, respectively. For the nine months ended September 30, 2023 and 2022, this agreement resulted in pre-tax income of $232,000 and $137,000, respectively. We do not anticipate the pre-tax income related to this agreement will offset the reduction in pre-tax income from customers that have transitioned to other prime service providers.

Management is assessing the future strategic direction of RISE, taking into consideration current market conditions, demand trends, and resources. While we believe our expertise and industry relationships will enable us to execute a new strategic direction, our business plan for RISE is untested, and it is uncertain whether our efforts will attract the customers and revenue necessary to compete in the market.

Transactions with Tigress and Hedge Connection

Siebert and RISE engaged in certain transactions with Tigress and Hedge Connection to exchange equity, cash, and respective leadership positions. Based upon the strategic direction of these ventures, management of the respective businesses decided to unwind the original transactions with these entities. See Note 3 – Transactions with Tigress and Hedge Connection and Note 12 – Equity Method Investment in Related Party for further detail.

Interest Rates

We are exposed to market risk from changes in interest rates. Such changes in interest rates primarily impact revenue from interest, marketing, and distribution fees. The Company primarily earns interest, marketing and distribution fees from margin interest charged on clients’ margin balances, interest on cash and securities segregated for regulatory purposes, and distribution fees from money market mutual funds in clients’ accounts. Securities segregated for regulatory purposes consist solely of U.S. government securities. If prices of U.S. government securities within our portfolio decline, we anticipate the impact to be temporary as we intend to hold our U.S. government securities portfolio to maturity. We seek to mitigate this risk by managing the average maturities of our U.S. government securities portfolio and setting risk parameters for securities owned, at fair value.

Client Account and Activity Metrics

The following tables set forth metrics we use in analyzing our client account and activity trends for the periods indicated. For the periods presented, there were no institutional client accounts or client activity metrics.

Client Account Metrics

• Retail customer net worth represents the total value of securities and cash in the retail customer accounts after deducting margin debits
• Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions
• Retail customer credit balances represents client cash held in brokerage accounts
• Retail customer money market fund value represents all retail customers accounts invested in money market funds
• Retail customer accounts represents the number of retail customers

Statements of Operations and Financial Condition

Statements of Operations for the Three Months Ended September 30, 2023 and 2022

Revenue

Commissions and fees for the three months ended September 30, 2023 were $1,986,000 and increased by $236,000 from the corresponding period in the prior year, primarily due to market conditions.

Interest, marketing and distribution fees for the three months ended September 30, 2023 were $7,194,000 and increased by $1,990,000 from the corresponding period in the prior year primarily due to rising interest rates that resulted in an increase in margin interest income and interest income received on U.S. government securities and bank deposits.

Principal transactions and proprietary trading for the three months ended September 30, 2023 were $3,753,000 and increased by $2,800,000 from the corresponding period in the prior year, primarily due to the factors discussed below.

The increase in realized and unrealized gain on primarily riskless principal transactions was primarily due to market conditions. The increase in unrealized gain on our portfolio of U.S. government securities was due to the following. We invested in 1-year treasury bills and 2-year treasury notes in order to enhance our yield on excess 15c3-3 deposits. During 2022, there was an increase in U.S. government securities yields, which created an unrealized loss on our U.S. government securities portfolio. In 2023, we began to record the reversal of the unrealized loss resulting in an unrealized gain due to the securities coming closer to maturity. We continually invest in US government securities based on market yields and cash needs.

We intend to hold our U.S. government securities portfolio to maturity and as such, the aggregate unrealized loss of $1.3 million as of September 30, 2023 will be returned over the duration of the government securities, at a point no later than the maturity of the securities, the latest maturity being April 2025. If the value of our portfolio of U.S. government securities declines further, we will incur further unrealized losses; however, we anticipate this loss to be temporary as we intend to hold our portfolio of U.S. government securities to maturity. We believe that the level invested reduces the risk of having to liquidate the securities prior to maturity.

Below is a summary of the change in the principal transactions and proprietary trading line item for the periods presented.

Market making for the three months ended September 30, 2023 was $223,000 and decreased by $500,000 from the corresponding period in the prior year, primarily due to market conditions.

Stock borrow / stock loan for the three months ended September 30, 2023 was $4,008,000 and decreased by $175,000 from the corresponding period in the prior year.

Advisory fees for the three months ended September 30, 2023 were $506,000 and increased by $69,000 from the corresponding period in the prior year, primarily due to market conditions.

Other income for the three months ended September 30, 2023 was $380,000 and decreased by $706,000 from the corresponding period in the prior year, primarily due to the termination of consulting fee income from a technology partner.

Operating Expenses

Employee compensation and benefits for the three months ended September 30, 2023 were $8,723,000 and increased by $1,433,000 from the corresponding period in the prior year, primarily due to an increase in commission payouts and incentive compensation.

Clearing fees, including execution costs for the three months ended September 30, 2023 were $581,000 and increased by $183,000 from the corresponding period in the prior year, primarily due to an increase in market activity.

Technology and communications expenses for the three months ended September 30, 2023 were $827,000 and decreased by $387,000 from the corresponding period in the prior year, primarily due to a decrease in costs related to a technology partner.

Other general and administrative expenses for the three months ended September 30, 2023 were $1,108,000 and increased by $36,000 from the corresponding period in the prior year, primarily due to an increase in travel and entertainment expenses.

Data processing expenses for the three months ended September 30, 2023 were $725,000 and decreased by $207,000 from the corresponding period in the prior year, primarily due to the termination of a technology vendor.

Rent and occupancy expenses for the three months ended September 30, 2023 were $467,000 and decreased by $95,000 from the corresponding period in the prior year primarily due to the termination of certain short term leases in 2023.

Professional fees for the three months ended September 30, 2023 were $979,000 and increased by $105,000 from the corresponding period in the prior year, primarily due to an increase in consulting and board of directors fees partially offset by a decrease in legal fees.

Depreciation and amortization expenses for the three months ended September 30, 2023 were $265,000 and increased by $25,000 from the corresponding period in the prior year.

Interest expense for the three months ended September 30, 2023 was $40,000 and decreased by $68,000 from the corresponding period in the prior year, primarily due to a decrease in interest related to notes payable.

Advertising and promotion expense for the three months ended September 30, 2023 was $62,000 and increased by $4,000 from the corresponding period in the prior year.

Non-Operating Income (Loss)

The impairment of investments for the three months ended September 30, 2023 was $0 and there was no change from the corresponding period in the prior year.

The loss from equity method investment in related party for the three months ended September 30, 2023 was $0 and decreased by $148,000 from the corresponding period in the prior year, primarily due to no proportional loss from our investment in Tigress in the third quarter of 2023.

Provision For (Benefit From) Income Taxes

The provision from income taxes for the three months ended September 30, 2023 was $1,516,000 and increased from the provision for income taxes by $1,043,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to an increase in pre-tax earnings in the third quarter of 2023. Refer to Note 18 – Income Taxes for additional detail.

Net Income (Loss) Attributable to Noncontrolling Interests

As further discussed in Note 1 – Organization and Basis of Presentation, we consolidate RISE’s financial results into our financial statements and reflect the portion of RISE not held by Siebert as a noncontrolling interests in our financial statements. The net loss attributable to noncontrolling interests for the three months ended September 30, 2023 was $4,000, and decreased by $81,000 from the corresponding period in the prior year, due to more expenses in RISE in 2022 associated with the exiting of the prime brokerage business.

Statements of Operations for the Nine Months Ended September 30, 2023 and 2022

Revenue

Commissions and fees for the nine months ended September 30, 2023 were $5,839,000 and decreased by $104,000 from the corresponding period in the prior year, primarily due to market conditions.

Interest, marketing and distribution fees for the nine months ended September 30, 2023 were $21,583,000 and increased by $10,866,000 from the corresponding period in the prior year primarily due to rising interest rates that resulted in an increase in margin interest income and interest income received on U.S. government securities and bank deposits.

Principal transactions and proprietary trading for the nine months ended September 30, 2023 were $9,207,000 and increased by $7,440,000 from the corresponding period in the prior year due to multiple factors, which is detailed in the table below as well as in the above section titled “Statements of Operations for the Three Months Ended September 30, 2023 and 2022.”

Market making for the nine months ended September 30, 2023 was $836,000 and decreased by $1,186,000 from the corresponding period in the prior year, primarily due to market conditions.

Stock borrow / stock loan for the nine months ended September 30, 2023 was $11,963,000 and increased by $54,000 from the corresponding period in the prior year, primarily due to the growth of stock locate and securities lending businesses.

Advisory fees for the nine months ended September 30, 2023 were $1,421,000 and increased by $1,000 from the corresponding period in the prior year.

Other income for the nine months ended September 30, 2023 was $963,000 and decreased by $1,626,000 from the corresponding period in the prior year, primarily due to the termination of consulting fee income from a technology partner.

Operating Expenses

Employee compensation and benefits for the nine months ended September 30, 2023 were $23,770,000 and increased by $2,018,000 from the corresponding period in the prior year, primarily due to an increase in incentive compensation and commission payouts, partially offset by lower employee healthcare costs and the elimination of compensation expenses related to RISE in 2023.

Clearing fees, including execution costs for the nine months ended September 30, 2023 were $1,265,000 and decreased by $2,000 from the corresponding period in the prior year.

Technology and communications expenses for the nine months ended September 30, 2023 were $2,409,000 and decreased by $965,000 from the corresponding period in the prior year, primarily due to a decrease in technology costs related to RISE as well as a decrease in costs related to a technology partner, partially offset by an increase in software license costs.

Other general and administrative expenses for the nine months ended September 30, 2023 were $3,320,000 and increased by $381,000 from the corresponding period in the prior year, primarily due to an increase in travel and entertainment expenses.

Data processing expenses for the nine months ended September 30, 2023 were $2,317,000 and increased by $182,000 from the corresponding period in the prior year, primarily due to an increase from timing of financial and trading technology costs partially offset by a decrease from the termination of a technology vendor.

Rent and occupancy expenses for the nine months ended September 30, 2023 were $1,436,000 and decreased by $55,000 from the corresponding period in the prior year.

Professional fees for the nine months ended September 30, 2023 were $3,060,000 and increased by $458,000 from the corresponding period in the prior year, primarily due to an increase in consulting and board of director fees partially offset by a reduction in legal fees.

Depreciation and amortization expenses for the nine months ended September 30, 2023 were $716,000 and decreased by $44,000 from the corresponding period in the prior year, primarily due to the completion of useful lives of certain software assets in 2022, offset by depreciation expense from the Miami office building.

Interest expense for the nine months ended September 30, 2023 was $222,000 and decreased by $113,000 from the corresponding period in the prior year, primarily due to a decrease in interest related to notes payable.

Advertising and promotion expenses for the nine months ended September 30, 2023 were $52,000 and decreased by $178,000 from the corresponding period in the prior year, primarily due to a decrease in promotional costs for various marketing initiatives.

Non-Operating Income (Loss)

The impairment of investments for the nine months ended September 30, 2023 was a loss of $1,035,000 and increased by $1,035,000 from the corresponding period in the prior year, primarily due to the impairment of our investment in a Retail Platform and Tigress.

The earnings of equity method investment in related party for the nine months ended September 30, 2023 was $111,000 and increased by $44,000 from the corresponding period in the prior year, primarily due to an increase in our proportional income from our investment in Tigress.

Provision For (Benefit From) Income Taxes

The provision from income taxes for the nine months ended September 30, 2023 was $3,621,000 and increased from the benefit for income taxes by $4,457,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to increased pre-tax earnings in the nine months ending September 30, 2023. Refer to Note 18 – Income Taxes for additional detail.

Net Income (Loss) Attributable to Noncontrolling Interests

As further discussed in Note 1 – Organization and Basis of Presentation, we consolidate RISE’s financial results into our financial statements and reflect the portion of RISE not held by Siebert as a noncontrolling interests in our financial statements. The net income attributable to noncontrolling interests for the nine months ended September 30, 2023 was $40,000, and increased by $445,000 from the corresponding period in the prior year, primarily due to more expenses in RISE in 2022 associated with the exiting of the prime brokerage business.

Statements of Financial Condition as of September 30, 2023 and December 31, 2022

Assets

Assets as of September 30, 2023 were $771,146,000 and increased by $43,098,000 from December 31, 2022, primarily due to an increase in securities borrowed, receivables from customers, and securities owned, at fair value, partially offset by a decrease in cash and cash equivalents and cash and securities segregated for regulatory purposes.

Liabilities

Liabilities as of September 30, 2023 were $699,581,000 and increased by $21,453,000 from December 31, 2022, primarily due to an increase in securities loaned partially offset by a decrease in payables to customers and payables to non-customers.

Liquidity and Capital Resources

Overview

We expect to use our available cash, cash equivalents, and potential future borrowings under our debt agreements and potential issuance of new debt or equity, to support and invest in our core business, including investing in new ways to serve our customers, potentially seeking strategic acquisitions to leverage existing capabilities, and for general capital needs (including capital, deposit, and collateral requirements imposed by regulators and SROs). Based on our current level of operations, we believe our available cash, available lines of credit, overall access to capital markets, and cash provided by operations will be adequate to meet our current liquidity needs for the foreseeable future. As of the date of this Report, other than the items detailed in the section below, there are no known or material events that would require us to use large amounts of our liquid assets to cover expenses.

Kakaopay

The net capital infusion from Kakaopay to Siebert from the First Tranche was approximately $15.4 million after the issuance cost. This capital is currently being used to enhance our regulatory capital, and is primarily invested in U.S. government securities and is in the line item “Securities owned, at fair value” on the statements of financial condition. The capital to be raised from the close of the Second Tranche is approximately $60.4 million. The consummation of the Second Tranche is subject to a number of conditions, which have not yet been satisfied as of the date of this Report. Refer to Note 5 – Kakaopay Transaction for further detail regarding these conditions. Refer to the Company’s Current Report on Form 8-K filed on May 3, 2023, incorporated herein by reference, for further detail regarding this transaction.

The net capital from the First Tranche provides Siebert with additional liquidity and the ability to expand its various business lines. Siebert’s current management intends to utilize the additional capital primarily to launch correspondent clearing, to expand its securities lending business, corporate services, order flow opportunities, and other initiatives.

Cash and Cash Equivalents

Our cash and cash equivalents were $4.9 million and $23.7 million as of September 30, 2023 and December 31, 2022, respectively.

Cash Requirements

The following table summarizes our short- and long-term material cash requirements as of September 30, 2023.

* On March 31, 2023, we entered into an agreement with a technology vendor for certain development projects. As of September 30, 2023, the total budget for this project was approximately $1.1 million over a term of 2 years.

** On July 7, 2023, we entered into a new lease agreement expiring in December 2028 for office space in the World Financial Center in New York City. This office will replace the New Jersey office as one of our key operating centers and the total commitment of the lease is approximately $2.1 million. The estimated build out cost for this office space is approximately $500,000.

Debt Agreements

We have a $4.3 million mortgage outstanding with East West Bank, and an unutilized loan for short term overnight demand borrowing of up to $25 million with BMO Harris as of September 30, 2023. For the nine months ended September 30, 2023, we paid off our $2.7 million loan outstanding with East West Bank. As of September 30, 2023, we were in compliance with all covenants related to our debt agreements.

Shelf Registration Statement

On February 18, 2022, we filed a shelf registration statement on Form S-3 that was declared effective on March 2, 2022 by the SEC for the potential offering, issuance and sale by Siebert of up to $100.0 million of our common stock, preferred stock, warrants to purchase our common stock and/or preferred stock, units consisting of all or some of these securities and subscription rights to purchase all or some of these securities. The registration statement was filed in reliance on General Instruction I.B.6 of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period. Assuming we remain subject to General Instruction I.B.6, at the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6 may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital.

At the Market Offering

On May 27, 2022, we entered into a Capital on DemandTM Sales Agreement with JonesTrading as agent, pursuant to which we may offer and sell, from time to time through JonesTrading, shares of our common stock having an aggregate offering amount of up to $9.6 million under our shelf registration statement on Form S-3. For the three and nine months ended September 30, 2023 and 2022, we did not sell any shares pursuant to this Sales Agreement. Refer to Note 21 – Commitments, Contingencies, and Other for additional detail.

Net Capital, Reserve Accounts, Segregation of Funds, and Other Regulatory Requirements

MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) and the Customer Protection Rule (15c3-3) of the Exchange Act and maintains capital and segregated cash reserves in excess of regulatory requirements. Requirements under these regulations may vary; however, MSCO has adequate reserves and contingency funding plans in place to sufficiently meet any regulatory requirements. In addition to net capital requirements, as a self-clearing broker-dealer, MSCO is subject to cash deposit and collateral requirements with clearing houses, such as the DTCC and OCC, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility. RISE, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1 and the corresponding regulatory capital requirements.

MSCO can transfer funds to Siebert as long as MSCO maintains its liquidity and regulatory capital requirements. RISE can transfer funds to its shareholders, of which Siebert is entitled to its proportional ownership interest, as long as RISE maintains its liquidity and regulatory capital requirements. For the three and nine months ended September 30, 2023 and 2022, MSCO and RISE had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 19 – Capital Requirements for more detail about our capital requirements.

Cash Flows

Cash provided by and used in operating activities consisted of net income (loss) adjusted for certain non-cash items. Net operating assets and liabilities at any specific point in time are subject to many variables, including variability in customer activity, the timing of cash receipts and payments, and vendor payment terms. The total changes in our statements of cash flows, especially our operating cash flow, are not necessarily indicative of the ongoing results of our business as we have customer assets and liabilities on our statements of financial condition.

For the nine months ended September 30, 2023, we had negative operating cash flow primarily due to the net change in receivables and payables to customers and non-customers as well as the net change in securities borrowed and securities loaned. We had investing cash outflows primarily from the build out of the Miami office building and development work related to technology initiatives. We had financing cash inflows primarily due to the Kakaopay transaction partially offset by the repayment of our loan with East West Bank.

For the nine months ended September 30, 2022, we had negative operating cash flow primarily due to the net change in receivables and payables to customers and non-customers as well as the net change in securities borrowed and securities loaned. We had investing cash outflows primarily from the build out of the Miami office building and development work related to technology initiatives. We had financing cash outflows related the repayment of a note payable – related party, partially offset by the issuance and transfer of RISE membership interests.

Long Term Contracts

Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. Refer to Note 16 – Deferred Contract Incentive and Note 21 – Commitments, Contingencies and Other for additional detail.

Effective June 2023, MSCO entered into an amendment to its service agreement with Broadridge Securities Processing Solutions, LLC that, among other things, extends the term of their arrangement for a five-year period ending June 2028, with an option to terminate after three years. The total minimum expense for this arrangement is estimated at approximately $1.3 million.

Off-Balance Sheet Arrangements

We enter into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and are, therefore, subject to varying degrees of market and credit risk. In the normal course of business, our customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose us to off-balance sheet risk in the event the customer or other broker is unable to fulfill their contracted obligations and we are forced to purchase or sell the financial instrument underlying the contract at a loss. There were no material losses for unsettled customer transactions for the three and nine months ended September 30, 2023 and 2022. Refer to Note 20 – Financial Instruments with Off-Balance Sheet Risk for additional detail.

Uncertain Tax Positions

We account for uncertain tax positions in accordance with the authoritative guidance issued under ASC 740-10, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements.

We recognize interest and penalties related to unrecognized tax benefits on the provision for income taxes line on the statements of operations. Accrued interest and penalties would be included on the related tax liability line on the statements of financial condition.

As of both September 30, 2023 and December 31, 2022, the Company recorded an uncertain tax position of $1,596,000 related to various tax matters, which is included in the line item “Taxes payable” in the statements of financial condition.

Critical Accounting Policies

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K. As of September 30, 2023, there have been no changes to our critical accounting policies or estimates.

New Accounting Standards

Refer to Note 2 - Summary of Significant Accounting Policies for additional information regarding new Accounting Standards Updates (“ASU”s) issued by the Financial Accounting Standards Board (“FASB”).

Financial Instruments Held For Trading Purposes

We do not directly engage in derivative transactions, have no interest in any special purpose entity and have no liabilities, contingent or otherwise, for the debt of another entity.

Financial Instruments Held For Purposes Other Than Trading

We generally invest our cash and cash equivalents temporarily in dollar denominated bank account(s). These investments are not subject to material changes in value due to interest rate movements.

We invest cash and securities segregated for regulatory purposes in dollar denominated bank accounts which are not subject to material changes in value due to interest rate movements. We also invest cash and securities segregated for regulatory purposes and securities owned, at fair value in U.S. government securities which may be subject to material changes in value due to interest rate movements. Securities owned, at fair value invested in U.S. government securities are generally purchased to enhance yields on required regulatory deposits. While the value of the government securities may be subject to material changes in value, we believe any reduction in value would be temporary since the securities would mature at par value.

Customer transactions are cleared through clearing brokers on a fully disclosed basis and are also self-cleared by MSCO. If customers do not fulfill their contractual obligations any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations may be incurred by Siebert. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions in the last five years.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Executive Vice President / Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report pursuant to Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the Chief Executive Officer and the Executive Vice President / Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Executive Vice President / Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on its evaluation, our management, including our Executive Vice President / Chief Financial Officer, concluded that as of the end of the period covered by this Report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) was identified during the end of the period covered by this Report, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information set forth in this Report, investors should carefully consider the risk factors discussed in Part I, Item 1A - Risk Factors in our 2022 Form 10-K and under Part II, Item 1A. of our Form 10-Qs. Each of such risk factors could materially affect our business, financial position, and results of operations. As of the date of this Report, other than the supplemental risk factors provided below, there have been no material changes from the risk factors disclosed in our 2022 Form 10-K.

There may be a limited public market for our common stock; Volatility.

12,959,556 shares of our common stock, or approximately 33% of our shares of our common stock outstanding, are currently held by non-affiliates as of November 10, 2023. A stock with a small number of shares held by non-affiliates, known as the “float,” will generally be more volatile than a stock with a large float. Although our common stock is traded on the Nasdaq Capital Market, there can be no assurance that an active public market will continue.

The Closing of the Second Tranche with Kakaopay is subject to a number of closing conditions, including various regulatory approvals, and there can be no assurance that such conditions will be satisfied or that the Second Tranche will close.

The consummation of the Second Tranche of the investment in Siebert by Kakaopay is subject to a number of conditions, which have not yet been satisfied as of the date of this Report. The conditions to Kakaopay’s obligation to close the Second Tranche include, among others, (i) the affirmative vote of a majority of the outstanding shares of Siebert’s common stock and the affirmative vote of the holders of a majority of the outstanding shares of Siebert’s common stock not beneficially owned, directly or indirectly, by the Gebbia Stockholders, Kakaopay or any of their respective affiliates, (ii) approval by FINRA, (iii) favorable completion of the review by CFIUS, (iv) certain performance conditions relating to order execution and the execution of employment and consulting agreements for key personnel of Siebert and MSCO, (v) the approvals in connection to the filing of an overseas direct investment report as required under the Foreign Exchange Transactions Act of the Republic of Korea, and, if applicable in accordance with applicable law, any antitrust report or filing with the Korea Fair Trade Commission shall have been obtained or provided; (vi) the listing by Siebert of the Second Tranche Shares on the Nasdaq Capital Market, (vii) the accuracy of certain representations and warranties of Siebert as of the closing of the Second Tranche, (viii) the absence of any material adverse effect having occurred with respect to Siebert between April 27, 2023 and the closing of the Second Tranche, and (ix) the performance by Siebert of all covenants, agreements and obligations required to be performed by it prior to the closing of the Second Tranche. The conditions to Siebert’s obligation to close the Second Tranche include, among others, (i) the affirmative vote of the holders of a majority of the outstanding shares of Siebert’s common stock not beneficially owned, directly or indirectly, by the Gebbia Stockholders, Kakaopay or any of their respective affiliates, (ii) approval by FINRA, (iii) favorable completion of the review by CFIUS, (iv) the accuracy of certain representations and warranties of Kakaopay as of the closing of the Second Tranche, (v) the absence of any material adverse effect having occurred with respect to Kakaopay between April 27, 2023 and the closing of the Second Tranche, and (vi) the performance by Kakaopay of all covenants, agreements and obligations required to be performed by it prior to the closing of the Second Tranche. There can be no assurance that any or all of the conditions necessary to close the Second Tranche Stock Purchase Agreement will be satisfied or that the Second Tranche will close. Certain of the conditions require action by Kakaopay, including providing information related to Kakaopay (and its affiliates) required to obtain FINRA and CFIUS approval.

Since the closing of the First Tranche, Korean authorities have taken action against Kakaopay, its parent company, Kakao Corp., and their affiliates. In addition, Kakao Corp., recently announced that it will establish an independent compliance committee for Kakao Corp. and its subsidiaries to address what it described as the current crisis at Kakao Corp. and its subsidiaries. Siebert believes these events have had a material adverse effect on both Kakaopay and its ability to perform its obligations under the Second Tranche Stock Purchase Agreement and consummate the transactions contemplated therein. Accordingly, on November 11, 2023, Siebert delivered a notice to Kakaopay stating that a material adverse effect had occurred with respect to Kakaopay and that, as a result, Siebert’s conditions to closing will not be satisfied. The notice also specified that Kakaopay has indicated that it has no intention of satisfying the conditions precedent to Siebert preparing the proxy statement contemplated by the Second Tranche Stock Purchase Agreement. Siebert is considering its rights and obligations under the Second Tranche Stock Purchase Agreement, including evaluating whether and under what circumstances the Second Tranche Stock Purchase Agreement might be terminated, and has reserved all of its rights and remedies, including Siebert’s right to assert that Kakaopay has materially breached a number of covenants in the Second Tranche Stock Purchase Agreement. On November 12, 2023, Kakaopay delivered a letter in response to the notice that expressed Kakaopay’s disagreement with the statements in the notice. As a result of the foregoing, Siebert has incurred and may incur additional legal expenses evaluating these matters, the amount of which is uncertain as of the date hereof.

Refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Transaction with Kakaopay above; and Siebert’s Current Report on Form 8-K filed on May 3, 2023, incorporated herein by reference, for further detail.